Merit
Rigid Demand Created by Urbanization Promotes Commercial Housing Sales
According to our model, every 1% growth of urbanization rate can lead to 5.1134%
increase of sales of commercial housing. Meanwhile, the target China’s urbanization
rate of 2020, which is 3.9% higher than that of 2015(56.1%), was already set by
“National Plan on New Urbanization” carried out in 2014, indicating an annual
6.90309% growth rate of the sales of commercial housing promoted by it on average.
That’s to say, if the urbanization can be promoted as expected, there will still be a
strong rigid demand created by it, offering the whole real estate industry a valuable
chance to de-stock or sale more. As a part of this huge industry, Vanke’s main business
may also benefit from the increasing sales of commercial housing, and therefore,
strengthen the profitability of it.
Prudent Monetary Policies Leads to Abundant Capital within Industry
The People’s Bank of China (PBC) continues its prudent monetary policies in 2015, with
5 times of reduction of interest and lending rate reduced to a historically low 4.9%. The
reserve requirement ratio (RRR) also fell back to an easing policy level. From the
perspective of industry capital, the real estate developing capital has reached RMB
12.52 trillion in 2015, reporting a 2.2% (YoY) increase. From the perspective of
formation of capital source, domestic loans and self-raised funds take up 14.6% and
39.2%, showing a 1.3% (YoY) decrease and a 2.2% decrease (YoY) respectively.
Loosening credit policies and continuous downtrend of market interest promote the
sales market, resulting in other sources (mainly pre-payment and mortgage repayment)
of real estate developing capital increasing 3.7% to a total of 44.5%.
Core Build-for-sale Operations Providing High Operating Cash Flows
Urbanization level has been consistently increasing over the years and is expected to
continue this trend in the future. Capital along with talents will surge up big cities
bringing both necessary real estate demands and life quality-improving housing
demands. Besides, the more and more complete competition market will squeeze
smaller player’s space who is confined to their limited capital, brand value, cost control
system on contrary the leading player including Vanke will enlarge market share. So the
two strong growth drivers ensure Vanke consistently meeting regulatory and marginal
goals and keeping high operating cash flows.
A Strong Balance Sheet as a Foundation for Growth and Innovation
Vanke has a favorable cash position as shown by its high liquidity ratios, also the
company has low levels of debt bearing interest lower than most main competitors.
These two conditions give the company financial flexibility to invest logistics industry
and experience new business model such as BOT. By taking the advantage of this
favorable position, Vanke is the first company in China who introduces REITs product
to discover new financing pattern.
Outstanding Management Capability and Stable Growth Drivers
Vanke has been able to adapt to a changing environment in the real estate industry
through adopting Asset-Light Strategy, utilizing an efficient web-based marketing
campaign and applying business partnership management system. Through these
business practices, Vanke has maintained stable profitability and growth. Vanke has
been maximizing its revenue by increasing market share, enhancing pricing power and
expanding its business line to a broader scope. As the market tends to be mature and
occupancy rates stand at a stable level, large companies as Vanke will occupy a market
share steadily in the short term. Thus growth will primarily be driven through real
estate development business, for which the company is well positioned.
Optimistic Outlook for Real Estate Market
De-Stocking of real estate market was listed one of the five primary tasks in 2016 for
the first time in the Central Economic Work Conference in the end of 2015, with
supporting policies as reducing the minimum down payment ratio to 20% and lowering
transaction taxes carried out during Spring Festival. This, undoubtedly, promotes the
de-stocking process. It is not difficult to assume that under the uncontrollable
macroeconomic downturn, investment still plays an important role in steady economic
growth. Both monetary and industry policies will be loosened further. As bonus policies
released continuously and consumer confidence recovering gradually, sales of
commercial housing this year will gain a smooth growth after the recovery in 2015.
Concern
Future Price Constrained by Various Economic Factors
Shown in Table1, the change of M2 money supply, GDP and per capita income of urban
households will greatly influence the price of commercial housing. As what is mentioned
in Economic Risk, China is still on the way of structural transformation, and is suffering
from a L-shaped recovery of economy, if the economy fails to develop in a normal speed,
the growth rate of both GDP and per capita income of urban households may also grow
in a lower speed than expected, or even decrease, and therefore, greatly constrains the